2018 (5) TMI 2146 - AT - Income Tax

TP Adjustment - Comparable selection - R Systems International Limited rejected as it has different accounting period inasmuch as this company s year ended on 31.12.2012 - HELD THAT - As there are case laws for the proposition that companies having a different financial year ending can be selected if the margin for the period April-March can be computed based on audited segmental information available - See Mercer Consulting (India) (P.) Ltd. 2016 (8) TMI 1163 - PUNJAB AND HARYANA HIGH COURT , PANGEA3 AND LEGAL DATABASE SYSTEMS PVT. LTD. 2017 (3) TMI 267 - ITAT MUMBAI and EGIS LIMITED 2017 (2) TMI 1204 - ITAT MUMBAI . Thus we hold that this comparable is to be selected. The Transfer Pricing Officer may verify the margin as computed by the assessee. Acropetal Technologies Limited - assessee submitted that the AO has taken health care segment from this comparable instead of the ITES services which is being compared - We direct the Transfer Pricing Officer to compute and take the margin of ITES Segment of the comparable for analysis. Persistent Systems Limited - Revenue has not brought out any difference in the functional profile of the assessee for the year under consideration with that of the assessee for those assessment years. Hence, the Tribunal in assessee s own case 2015 (11) TMI 1582 - ITAT MUMBAI has accepted that a software product company is not comparable to assessee company which is into software development services. Accordingly, respectfully following the above precedent, we hold that this comparable has to be excluded from the final list of the comparables. Aspire Systems (India) Private Limited - assessee submitted that this company is into IT Consultancy and Software Product Development and it is not Software Service Company - DRP has held that it was the assessee s submissions that this comparable is into varied activities, the same argument has been placed before us. The Dispute Resolution Panel has held that this company is into Development and Software. Dispute Resolution Panel has held that merely because this company is having IPs R D centre, one cannot reject the comparable. We find that the ld. Counsel of the assessee has not been able to cogently rebut the findings of the authorities below. Hence, the objection of the ld. Counsel of the assessee against the selection of Aspire System Ltd. is rejected. Infobeans Technologies Limited - DRP found that this company s business is similar with that of the assessee - As found that Infobeans Software Solutions Pvt. Ltd. is into development of software and its sale. We find that from the perusal of the financial of this comparable submitted in the paper book we agree with the finding of the Dispute Resolution Panel and held that merely because company has shown sale of software in profit and loss account, one cannot reject this comparable. As regards the ld. Counsel of the assessee s submission that there has been a demerger in the said comparable, hence it is not comparable, we find that it has not been explained as how the demerger has affected the results. Hence, we reject this aspect also of tassessee s submission. Hence, we affirm the Transfer Pricing Officer s action for inclusion of this comparable. Thirdware Solutions Limited - assessee submitted that this comparable is into acquisition/purchase of hardware and software including software as a service - When this company's substantial revenue is from other various business segments like sale of licence, software services and segmental results are not available, this company cannot be a valid comparable for benchmarking the international transaction. Following the cases M/S. IVY COMPTECH LIMITED 2014 (12) TMI 1414 - TELANGANA HIGH COURT and M/S INTOTO SOFTWARE INDIA PVT. LIMITED HYDERABAD 2014 (3) TMI 1071 - ANDHRA PRADESH HIGH COURT we hold that this is not a valid comparable in the present case. Inclusion of Pass-through Costs in the Operating Margin - TPO has recomputed the PLI by considering the out sourcing cost as operating cost, whereas the assessee has treated the same as pass through cost and adjusted the same in indirect expenses - HELD THAT - We find that as rightly held by the authorities below, the outsourcing cost is directly related to the software development and services. It is not the case that the AE has directly given contract to other parties, rather it is to the assessee who has sub-contracted its part of work. The assessee has merely developed a part of the software through out-sourcing instead of in-house development. The outsourced work is incorporated in the work of the assessee in the final software prior to providing the same to the AE. Hence, we are in agreement that the TPO has correctly considered the outsourcing cost as operating expense of the assessee. Assessee appeal is partly allowed.

Summary

Issues Involved:
1. Adjustment under Chapter X of the Income-tax Act, 1961.
2. Selection of comparable companies and use of non-contemporaneous data.
3. Application of filters in selecting comparable companies.
4. Rejection of companies with similar functions, assets, and risks.
5. Cherry-picking of companies for determining the arm's length price.
6. Incorrect computation of the margin of companies.
7. Inclusion of pass-through costs in the margin computation.
8. Adjustments under Rule 10B of the Income-tax Rules, 1962.
9. Disregarding the transfer pricing study report.
10. Referral to the Transfer Pricing Officer without recording reasons.
11. Use of multiple year data as specified in Proviso to Rule 10B(4).
12. Denial of the benefit of +/- 3 percent range under Section 92C(2).
13. Credit of tax under Section 115JAA.
14. Levy of interest under Sections 234B and 234C.

Detailed Analysis:

1. Adjustment under Chapter X of the Income-tax Act, 1961:
The main ground of appeal was the determination of the arm's length price (ALP) by the Assessing Officer (AO). The AO made an adjustment of INR 8,32,28,304 under Chapter X of the Income-tax Act, 1961, based on the Transfer Pricing Officer’s (TPO) computation, which the Dispute Resolution Panel (DRP) upheld.

2. Selection of comparable companies and use of non-contemporaneous data:
The assessee argued that the TPO and AO erred in cherry-picking new companies and using non-contemporaneous data. The TPO selected certain comparable companies, which the assessee contested on functional dissimilarity grounds. The DRP upheld the inclusion of these companies, stating they were functionally comparable.

3. Application of filters in selecting comparable companies:
The TPO applied various filters for selecting comparable companies, such as financial data availability, turnover range, manufacturing sales ratio, related party transactions, and consistent profitability. The assessee argued that the TPO applied these filters inconsistently, but the DRP found the filters appropriate.

4. Rejection of companies with similar functions, assets, and risks:
The TPO rejected several companies selected by the assessee for reasons such as different accounting periods, low export turnover, and low employee costs. The DRP upheld these rejections, agreeing with the TPO’s rationale.

5. Cherry-picking of companies for determining the arm's length price:
The assessee contended that the TPO cherry-picked companies without considering their functional dissimilarity. The DRP reviewed the objections and upheld the TPO’s selection, finding the companies functionally comparable.

6. Incorrect computation of the margin of companies:
The TPO recomputed the Profit Level Indicator (PLI) by including outsourcing costs as operating costs, which the assessee had treated as pass-through costs. The DRP upheld the TPO’s computation, stating that the outsourcing costs were directly related to software development and services.

7. Inclusion of pass-through costs in the margin computation:
The assessee argued that the TPO erred in including pass-through costs while computing the margin. The DRP rejected this argument, noting that the outsourcing costs were part of the operating expenses and directly related to the assessee’s services.

8. Adjustments under Rule 10B of the Income-tax Rules, 1962:
The assessee claimed that necessary adjustments were not made to account for differences between the international transaction and comparable companies. The DRP found no merit in this claim and upheld the TPO’s approach.

9. Disregarding the transfer pricing study report:
The assessee argued that the TPO disregarded its transfer pricing study report. The DRP found that the TPO had considered the report but found it lacking in certain aspects, justifying the adjustments made.

10. Referral to the Transfer Pricing Officer without recording reasons:
The assessee contended that the AO referred the matter to the TPO without recording reasons. The DRP did not find this argument convincing and upheld the referral.

11. Use of multiple year data as specified in Proviso to Rule 10B(4):
The assessee argued for the use of multiple year data, which the TPO rejected. The DRP upheld the TPO’s decision, stating that single-year data should be considered unless it is demonstrated that prior years’ data influenced the current year’s profits.

12. Denial of the benefit of +/- 3 percent range under Section 92C(2):
The DRP directed the AO to follow the statutory provisions of Section 92C(2) if applicable, but the assessee’s specific objections were rejected.

13. Credit of tax under Section 115JAA:
The assessee did not press this ground, and it was dismissed as not pressed.

14. Levy of interest under Sections 234B and 234C:
The assessee did not press this ground, and it was dismissed as not pressed.

Conclusion:
The appeal was partly allowed, with specific directions to the TPO for recomputation of margins and inclusion/exclusion of certain comparables based on the Tribunal’s findings. The Tribunal upheld most of the TPO and DRP’s decisions but directed the TPO to verify and recompute margins for certain comparables as per the Tribunal’s guidance.